Alan Greenspan stands accused of helping to cause the current US economic troubles by cutting interest rates too far when markets fell in 1998. Japan has often considered attempting to underpin its equity market. It has feared the effect on its banks' balance sheets of falling stock prices. The UK }Financial Services Authority now risks making a similar mistake by fudging its resilience tests for life insurance company solvency.

Equity market declines before September 11 led a number of UK life insurers to come close to failing these tests. They required companies to be able to meet all liabilities even if the value of their equity assets fell by 25 per cent. The FSA did not want to be seen to force life companies to sell equities to meet this test, so it relaxed the criteria. Now companies only have to assume a 10 per cent fall in equity values.

But equities kept falling after the terrorist attacks and the weaker life insurers again came close to failing this looser resilience test. The FSA blinked again. On Monday it effectively got rid of that 10 per cent cushion.

The FSA was in a bind. The life insurance sector accounts for about 20 per cent of the UK equity market. Forced sales of equities to ensure a life company passed the resilience test might lead to further falls in equity prices and more life companies failing resilience tests and having to sell equities. A downward spiral of stock prices loomed.

But in choosing to relax the rules, the FSA has exposed other serious regulatory problems. First, that its existing regulations to ensure the solvency of life insurance companies do not work. There is little point in having rules that are waived the moment they become binding.

Second, the FSA has implicitly accepted that recent equity price falls are temporary. If so, relaxing the resilience rules will have been correct. The weakest life companies will soon recover their positions. But if equity prices continue to fall or remain low for some time, the FSA will have a case to answer. It will rightly be accused of encouraging weaker life companies to take inappropriate risks by staying in equities.

Third, some life insurers have accepted far too weak balance sheets, assuming continued high equity returns. After exceptionally high returns since 1975, a correction that takes the market back to the level of 1997 should not threaten the solvency of companies that aim to smooth volatility in the market.

The FSA had little choice in relaxing the rules. The alternative seemed too bleak to contemplate. But it must now hope for a recovery in equity prices and then begin a systematic rethink of its rules.